"No investor should come to debt funds expecting that it is as safe as FDs but will give you higher returns.”

“It is high time investors stop comparing debt funds to FDs. No investor should come to debt funds expecting that it is as safe as FDs but will give you higher returns,” says Mahendra Jajoo , Head of Fixed Income at Mirae AMC.

A lot is being said and written about debt funds lately. Investors are spooked and many investors have moved away from debt funds. How do you view the situation? I think the first important thing is that debt funds are an option to the investor where they get an opportunity to earn higher returns than a fixed deposit. When there is extra return, there is extra risk. Investors need to understand this fact. So, when you see a fund or a category offering more returns, you know they might be riskier.

As far as the Indian bond markets are concerned, the domestic factors are extremely supportive, but there is headwind coming from the global markets. India as a country is going strong, the conditions are good and we expect the markets to do well. Small volatile situations will come and go. But investors should stay focussed. It is high time investors stop comparing debt funds to FDs. These are not similar products and lead to confusion in the mind of investors. No investor should come to debt funds expecting that it is as safe as FDs but will give you higher returns. There is no free lunch in the world.

As you said, most investors either compare debt funds to RDs or FMPs. There is a lack of awareness among investors about the types of debt funds and the risk involved. Therefore, many of them end up disappointed. What is the industry doing to address the issue? I think there is a lot of transparency. All the offer documents have specifications related to the particular schemes. Where the scheme is investing, what are the kinds of instruments… everything is there. Neglecting these risks and investing is putting your own capital in trouble.

It is true that investors get into debt funds primarily because they are safer. The point is how people define safety. The problem arises when there is a mismatch between the investor’s expectation and information. The investors need to get deeper into what type of funds they want to invest and distributors and advisors need to facilitate this. There sure is a lack of awareness. It is time that the investors understand that volatility is the part and parcel of the market.

Even after all the disclosures, events like Ballarpur happened. Investors are spooked. What do you think the fund houses should do? See, we should be very clear to the investors about what they are getting into. There shouldn’t be any misguiding claims from the AMCs. But if the investor ignores the risk and gets into a fund, we can’t help it. When you speak about defaults, that can’t be controlled beyond a point. The way the businesses are getting disrupted, companies that are bluechip today can become defaulting in the coming three years or five years. The default might or might not happen, but that is exactly what taking risk is.

Speaking about defaults, how ethical is it to invest in very low rated instruments? Should one draw a line? I think the mutual fund industry is very good with its ethics. There is a market watchdog which keeps a check on the kind of products you are launching. There are authorities which have their eyes on whether any AMC or fund is flouting the guidelines. Speaking about credit opportunities if you think a lower-rated paper can do well and you disclose the fact to your investor, I think it is fair. But there should be an adequate disclosure. Like in the case of Ballarpur default, it is very difficult to blame someone. Maybe when the fund manager chose the papers, they were looking good and over the years situations changed. Until the fund is giving returns, there is no confusion but at the time of a default everyone questions you.

There are no clear definitions and categories when it comes to debt funds. Don’t you think that also creates a lot of confusion among investors? I agree. There are no set definitions and buckets in which you can put the debt funds. This is the basis of the confusion. With time things are changing and evolving. If you go back five years, there was no such category as a credit opportunities fund. But confusions and complications are everywhere. Moreover, when you put in your money, don’t you think, you should know what is being done to it. It is very important to ask questions about the schemes that you are getting into. You can’t take a risk on your own money and say I don’t have an idea about it.

What do you advise debt investors at this point in the market? What should be their strategy? I think a lot has been said about the interest rate cycle. I know there is volatility, but there is volatility in equity markets as well. People have stopped worrying about the volatility in equities since they got the trick of SIPs. The basic of SIP is to not worry about short-term volatility. Similarly, investors should look at debt funds also. Investors need to accept the fact that there will be events which will bring volatility in the short-term, but you don’t get distracted from your goal.

Moreover, we are at point where we need to react to whatever happens in the market rather than predicting things. So, I think dynamic bond funds are a good option at this point.